8-1

Flexible Budgets, Standard Costs,

and Variance Analysis

Chapter 9
Variance Analysis
• Budgets offer feedback in the form of variances: actual
results deviate from budgeted targets

• Variance analysis is a necessary step to understand why

a difference occurred.

• Variances provide managers with:

• Early warning of problems
• A basis for performance evaluation
• A basis for strategy evaluation

9-2
Variance Analysis
• Favorable variance (F) – increases operating income
relative to the budgeted or standard amount.

• Unfavorable variance (U) – decreases operating income

relative to the budgeted or standard amount.

• The label of “favorable’ and “unfavorable” should not be

considered as indications of good or bad performance
without additional investigation.

9-3
Variance Analysis Cycle

9-4
Learning Objective 1

Preparing a planning
budget and a flexible
budget and understand
how they differ from one
another.

9-5
Deficiencies of the Static Planning Budget

Larry’s Lawn Service provides lawn care in a planned

community where all lawns are approximately the same size.
At the end of May, Larry prepared his June budget based on
mowing 500 lawns. Since all of the lawns are similar in size,
Larry felt that the number of lawns mowed in a month would
be the best way to measure overall activity for his business.

Larry’s Budget
9-6
Larry’s Budget
9-7
 Deficiencies of the Static Planning Budget
Larry’s Static Planning Budget

Mixed
Costs
Variable
Costs
Fixed
Costs

9-8
Deficiencies of the Static Planning Budget
Larry’s Actual Results

9-9
 Deficiencies of the Static Planning Budget
Larry’s Actual Results Compared with the Planning Budget

9-10
 Deficiencies of the Static Planning Budget
Larry’s Actual Results Compared with the Planning Budget
F = Favorable variance that occurs when actual
revenue is greater than budgeted revenue.

U = Unfavorable variance that occurs when

actual costs are greater than budgeted costs.

F = Favorable variance that occurs when

actual costs are less than budgeted costs.

9-11
 Deficiencies of the Static Planning Budget
Larry’s Actual Results Compared with the Planning Budget

Since these variances are unfavorable, has

Larry done a poor job controlling costs?

Since these variances are favorable, has

Larry done a good job controlling costs?

9-12
Deficiencies of the Static Planning Budget

I don’t think I Actual activity is above

can answer the planned activity.
questions using
a static budget. So, shouldn’t the variable
costs be higher if actual
activity is higher?

9-13
Deficiencies of the Static Planning Budget

Hmm! Comparing
Static planning budgets
static planning budgets
are prepared for with actual costs
a single, planned is like comparing
level of activity. apples and oranges.

Performance evaluation
is difficult when actual
activity differs from the
planned level of activity.

9-14
How a Flexible Budget Works

▪ The relevant question is . . .

“How much of the cost variances are
due to higher activity and how much
are due to cost control?”
▪ To answer the question,
we must
the budget to the
actual level of activity.

9-15
Flexible Budget: Larry’s Lawn Service

Let’s prepare a
budget
for Larry’s Lawn
Service.

9-16
Flexible Budget: Larry’s Lawn Service
Larry’s Flexible Budget

9-17
Characteristics of Flexible Budgets

May be prepared for any activity

level in the relevant range.

Show costs that should have been

incurred at the actual level of
activity, enabling “apples to apples”
cost comparisons.

Help managers control costs.

Improve performance evaluation.

9-18
Concept Check 1
What should the total wages and salaries cost
be in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000.
c. $23,000.
d. $25,000.

9-19
Concept Check 1a
What should the be the
totaltotal
wages
wages
andandsalaries
salaries
cost
costinina aflexible
be flexiblebudget
budgetforfor600
600lawns?
lawns?
a. $18,000.
$18,000
b. $20,000.
c. $23,000.
d. $25,000.

Total wages and salaries cost

= $5,000 + ($30 per lawn  600 lawns)
$5,000 + $18,000 = $23,000

9-20
Learning Objective 2

Calculate and interpret

revenue and spending
variances.

9-21
Flexible Budget Variances

Actual revenue Flexible budget revenue

Revenue variance

Actual cost Flexible budget cost

Spending variance

9-22
Flexible Budget Variances

Now, let’s use budgeting

concepts to compute revenue and
spending variances for Larry’s Lawn
Service.

9-23
Revenue Variances
Larry’s Flexible Budget Compared with the Actual Results
Revenue variance
$1,750 favorable

9-24
Spending Variances
Larry’s Flexible Budget Compared with the Actual Results
Spending Variances
$1,950 unfavorable total

9-25
Learning Objective 3

Prepare a flexible budget

with more than one cost
driver.

9-26
Flexible Budgets with Multiple Cost Drivers

More than one cost

driver may be needed to
adequately explain all of
the costs in an organization.

The cost formulas used

to prepare a flexible
budget can be adjusted
to recognize multiple
cost drivers.
9-27
Flexible Budgets with Multiple Cost Drivers

Because the time required for edging and trimming is

different for different lawns, Larry decided to add an
additional cost driver (hours) for the additional time
required for edging and trimming.

Larry’s New Budget

9-28
Flexible Budgets with Multiple Cost Drivers
Larry’s Budget Based on More than One Cost Driver

9-29
Learning Objective 4,5,6

Compute the price and

quantity variances and
explain their significance.

9-30
 Standard Costs
Standards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of standards are commonly used.

Quantity standards Price standards

specify how much of an specify how much
input should be used to should be paid for
make a product or each unit of the
provide a service. input.

9-31
Setting Direct Materials Standards
Standard Price Standard Quantity
per Unit per Unit

Final, delivered Summarized in

cost of materials, a Bill of Materials.
net of discounts.

9-32
Setting Direct Labor Standards
Standard Rate Standard Hours
per Hour per Unit

Often a single Use references to

rate is used that reflects estimate the time
the mix of wages earned. needed for each labor
operation.

9-33
Setting Variable Manufacturing Overhead
Standards
Price Quantity
Standard Standard

The rate is the The quantity is

variable portion of the the activity in the
predetermined overhead allocation base for
rate. predetermined overhead.

9-34
The Standard Cost Card

A standard cost card for one unit of

product might look like this:
A B AxB
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. $ 4.00 per lb. $ 12.00
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost $ 54.50

9-35
Using Standards in Flexible Budgets

Standard costs per unit for direct materials, direct

labor, and variable manufacturing overhead can be
used to compute activity and spending variances.

Spending variances become more

useful by breaking them down into
quantity and price variances.
9-36
A General Model for Variance Analysis

Variance Analysis

Price Variance Quantity Variance

Difference between Difference between

actual price and actual quantity and
standard price standard quantity
• Materials price variance • Materials quantity variance
• Labor rate variance • Labor efficiency variance
• VOH rate variance • VOH efficiency variance
9-37
 Price and Quantity Standards
Price and quantity standards are
determined separately for two reasons:

1. Different managers are usually responsible for buying

and using inputs. For example, the purchasing
manager is responsible for raw material purchase
prices and the production manager is responsible for
the quantity of raw material used.

2. The buying and using activities occur at different times.

Raw material purchases may be held in inventory for a
period of time before being used in production.
9-38
A General Model for Variance Analysis

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(1) – (2) (2) – (3)

Spending Variance
(1) – (3)
9-39
A General Model for Variance Analysis
Actual quantity is the amount of direct materials, direct
labor, and variable manufacturing overhead actually used.
(The quantities pertain to input items.)
(1) (2) (3)
Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(1) – (2) (2) – (3)

Spending Variance
(1) – (3)
9-40
A General Model for Variance Analysis
Standard quantity is the standard quantity allowed
for the actual output of the period.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(1) – (2) (2) – (3)

Spending Variance
(1) – (3)
9-41
A General Model for Variance Analysis
Actual price is the amount actually
paid for the input used.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(1) – (2) (2) – (3)

Spending Variance
(1) – (3)
9-42
A General Model for Variance Analysis

Standard price is the amount that should

have been paid for the input used.

(1) (2) (3)

Actual Quantity Actual Quantity Standard Quantity
of Input, of Input, Allowed for Actual Output,
at Actual Price at Standard Price at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)

Price Variance Quantity Variance

(1) – (2) (2) – (3)

Spending Variance
(1) – (3)
9-43
Learning Objective 4

Compute the direct

materials price and
quantity variances and
explain their significance.

9-44
Materials Variances – An Example
 Glacier Peak Outfitters has the following
direct materials standard for the fiberfill in its
mountain parka.
 0.1 kg. of fiberfill per parka at $5.00 per kg.
 Last month 210 kgs. of fiberfill were
purchased and used to make 2,000 parkas.
 The materials cost a total of $1,029.

9-45
Materials Variances Summary

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× × ×
$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable

9-46
Materials Variances: Standard Quantity

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× 0.1 kg per parka× 2,000 parkas ×
$4.90 per kg. = 200per
$5.00 kgskg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable

9-47
Materials Variances: Actual Price

Actual Quantity Actual Quantity Standard Quantity

× × ×
Actual Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs.
× $1,029  ×
210 kgs ×
$4.90 per kg. $5.00 per
= $4.90 per kg
kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000

Price variance Quantity variance

$21 favorable $50 unfavorable

9-48
Materials Variances: Using the Factored
Equations
Materials price variance
MPV = (AQ × AP) – (AQ × SP)
= AQ(AP – SP)
= 210 kgs ($4.90/kg – $5.00/kg)
= 210 kgs (– $0.10/kg) = $21 F

Materials quantity variance

MQV = (AQ × SP) – (SQ × SP)
= SP(AQ – SQ)
= $5.00/kg (210 kgs – (0.1 kg/parka  2,000 parkas))
= $5.00/kg (210 kgs – 200 kgs)
= $5.00/kg (10 kgs) = $50 U
9-49
Responsibility for Materials Variances

Materials Quantity Variance Materials Price Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity variance

so that the production manager is not held responsible for
the purchasing manager’s performance.
9-50
Responsibility for Materials Variances
Your poor scheduling
I am not responsible for sometimes requires me to
this unfavorable materials rush order materials at a
quantity variance. higher price, causing
You purchased cheap unfavorable price variances.
material, so my people
had to use more of it.

Production Manager Purchasing Manager 9-51

Quick Check 2
Hanson Inc. has the following direct materials standard to
manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were purchased and
used to make 1,000 Zippies. The materials cost a total of
$6,630.

How many pounds of materials should Hanson have used to

make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds.
c. 1,200 pounds.
d. 1,000 pounds.
9-52
Quick Check 2a

How many pounds of materials should Hanson

have used to make 1,000 Zippies?
a. 1,700 pounds.
b. 1,500 pounds. The standard quantity is: 1,000 ×
c. 1,200 pounds. 1.5 pounds per Zippy.
d. 1,000 pounds.

9-53
Quick Check 3
Hanson Inc. has the following direct materials standard to
manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were purchased and
used to make 1,000 Zippies. The materials cost a total of
$6,630.

Hanson’s materials quantity variance (MQV) was:

a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

9-54
Quick Check 3a

Hanson’s materials quantity variance (MQV) was:

a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
MQV = SP(AQ - SQ)
MQV = $4.00(1,700 lbs - 1,500 lbs)
MQV = $800 unfavorable

9-55
Quick Check 4
Hanson Inc. has the following direct materials standard to
manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week, 1,700 pounds of materials were purchased and
used to make 1,000 Zippies. The materials cost a total of
$6,630.

Hanson’s materials price variance (MPV) was:

a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.

9-56
Quick Check 4a

Hanson’s materials price variance (MPV)

was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
MPV = AQ(AP - SP)
d. $800 favorable.MPV = 1,700 lbs. × ($3.90 - 4.00)
MPV = $170 Favorable

9-57
Quick Check 3a & 4a Zippy
Recall that the standard quantity for 1,000 Zippies
is 1,000 × 1.5 pounds per Zippy = 1,500 pounds.
Actual Quantity Actual Quantity Standard Quantity
× × ×
Actual Price Standard Price Standard Price

1,700 lbs. 1,700 lbs. 1,500 lbs.

× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000

Price variance Quantity variance

$170 favorable $800 unfavorable
9-58
Learning Objective 5

Compute the direct labor

rate and efficiency
variances and explain
their significance.

9-59
Labor Variances – An Example

Glacier Peak Outfitters has the following direct labor

standard for its mountain parka.

1.2 standard hours per parka at $10.00 per hour

Last month, employees actually worked 2,500 hours

at a total labor cost of $26,250 to make 2,000
parkas.

9-60
Labor Variances Summary
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$10.50 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

9-61
Labor Variances: Standard Hours
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
1.2 hours per parka  2,000
× × ×
parkas = 2,400 hours
$10.50 per hour $10.00 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

9-62
Labor Variances: Actual Rate
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× $26,250× 2,500 hours ×
$10.50 per hour $10.00 per hour
= $10.50 per hour $10.00 per hour
= $26,250 = $25,000 = $24,000

Rate variance Efficiency variance

$1,250 unfavorable $1,000 unfavorable

9-63
Labor Variances: Using the Factored
Equations
Labor rate variance
LRV = (AH × AR) – (AH × SR)
= AH (AR – SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = (AH × SR) – (SH × SR)
= SR (AH – SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
9-64
Responsibility for Labor Variances
Production managers are Mix of skill levels
usually held accountable assigned to work tasks.
for labor variances
because they can
Level of employee
influence the:
motivation.

Quality of production
supervision.

Quality of training
provided to employees.
Production Manager
9-65
Responsibility for Labor Variances
I think it took more time
to process the
I am not responsible for materials because the
the unfavorable labor Maintenance
efficiency variance! Department has poorly
maintained your
You purchased cheap
equipment.
material, so it took more
time to process it.

Production Manager Purchasing 9-66

Quick Check 5
Hanson Inc. has the following direct labor standard to
manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor hour
Last week, 1,550 direct labor hours were worked at a total
labor cost of $18,910 to make 1,000 Zippies.

Hanson’s labor rate variance (LRV) was:

a. $310 unfavorable.
b. $310 favorable.
c. $330 unfavorable.
d. $330 favorable.

9-67
Quick Check 5a

Hanson’s labor rate variance (LRV) was:

a. $310 unfavorable.
b. $310 favorable.
c. $330 unfavorable.
d. $330 favorable.

LRV = AH(AR - SR)

LRV = 1,550 hrs($12.20 - $12.00)
LRV = $310 unfavorable

9-68
Quick Check 6
Hanson Inc. has the following direct labor standard to
manufacture one Zippy:
1.5 standard hours per Zippy at
$12.00 per direct labor hour
Last week, 1,550 direct labor hours were worked at a total
labor cost of $18,910 to make 1,000 Zippies.

Hanson’s labor efficiency variance (LEV) was:

a. $650 unfavorable.
b. $650 favorable.
c. $600 unfavorable.
d. $600 favorable.

9-69
Quick Check 6a

Hanson’s labor efficiency variance (LEV)

was:
a. $650 unfavorable.
b. $650 favorable.
c. $600 unfavorable.
LEV = SR(AH - SH)
d. $600 favorable.
LEV = $12.00(1,550 hrs - 1,500 hrs)
LEV = $600 unfavorable

9-70
 Concept Check 5a & 6a

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$12.20 per hour $12.00 per hour $12.00 per hour
= $18,910 = $18,600 = $18,000

Rate variance Efficiency variance

$310 unfavorable $600 unfavorable
9-71
Learning Objective 6

Compute the variable

manufacturing overhead
rate and efficiency
variances and explain
their significance.

9-72
Variable Manufacturing Overhead Variances:
An Example

Glacier Peak Outfitters has the following direct

variable manufacturing overhead labor standard for
its mountain parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours
to make 2,000 parkas. Actual variable
manufacturing overhead for the month was
$10,500.

9-73
Variable Manufacturing Overhead Variances:
Summary
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×
$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable

9-74
Variable Manufacturing Overhead Variances:
Standard Hours
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× ×  2,000
1.2 hours per parka ×
$4.20 per hour parkas$4.00 per hour
= 2,400 hours $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable

9-75
Variable Manufacturing Overhead Variances:
Actual Rate
Actual Hours Actual Hours Standard Hours
× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
×  2,500 hours
$10,500 × ×
$4.20 per hour = $4.20
$4.00 perper hour
hour $4.00 per hour
= $10,500 = $10,000 = $9,600

Rate variance Efficiency variance

$500 unfavorable $400 unfavorable

9-76
Variable Manufacturing Overhead Variances:
Using Factored Equations
Variable manufacturing overhead rate variance
VMRV = (AH × AR) – (AH – SR)
= AH (AR – SR)
= 2,500 hours ($4.20 per hour – $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
Variable manufacturing overhead efficiency variance
VMEV = (AH × SR) – (SH – SR)
= SR (AH – SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
9-77
Quick Check 7
Hanson Inc. has the following variable manufacturing
overhead standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$3.00 per direct labor hour
Last week, 1,550 hours were worked to make 1,000 Zippies,
and $5,115 was spent for variable manufacturing overhead.

Hanson’s efficiency variance (VMEV) for variable

manufacturing overhead was:
a. $200 unfavorable.
b. $200 favorable.
c. $150 unfavorable.
d. $150 favorable.
9-78
Quick Check 7a

Hanson’s efficiency variance (VMEV) for variable

manufacturing overhead was:
a. $200 unfavorable.
b. $200 favorable.
c. $150 unfavorable.
d. $150 favorable. 1,000 units × 1.5 hrs per unit

VMEV = SR(AH - SH)

VMEV = $3.00(1,550 hrs - 1,500 hrs)
VMEV = $150 unfavorable
9-79
Quick Check 8
• Hanson Inc. has the following variable manufacturing
overhead standard to manufacture one Zippy:
1.5 standard hours per Zippy at
$3.00 per direct labor hour
Last week, 1,550 hours were worked to make 1,000 Zippies,
and $5,115 was spent for variable manufacturing overhead.

Hanson’s rate variance (VMRV) for variable manufacturing

overhead was:
a. $465 unfavorable.
b. $400 favorable.
c. $330 unfavorable.
d. $330 favorable.
9-80
Quick Check 8a

Hanson’s rate variance (VMRV) for variable

manufacturing overhead was:
a. $465 unfavorable.
b. $400 favorable.
c. $330 unfavorable.
d. $330 favorable.
VMRV = AH(AR - SR)
VMRV = 1,550 hrs($3.30 - $3.00)
VMRV = $465 unfavorable
9-81
 Concept Check 7a & 8a

Actual Hours Actual Hours Standard Hours

× × ×
Actual Rate Standard Rate Standard Rate
1,550 hours 1,550 hours 1,500 hours
× × ×
$3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500

Rate variance Efficiency variance

$465 unfavorable $150 unfavorable
9-82
Materials Variances: An Important Subtlety

The quantity variance is

computed only on the
quantity used in
production.
The price variance is
computed on the entire
quantity purchased.
9-83
Materials Variances: An Important Subtlety

Glacier Peak Outfitters has the following direct materials

standard for the fiberfill in its mountain parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased at a cost of
$1,029. Glacier used 200 kgs. to make 2,000 parkas.

9-84
 Materials Variances: An Important Subtlety
Materials Quantity Variance
Actual Quantity Actual Quantity Actual Quantity
Purchased Purchased Used Standard Quantity
× × × ×
Actual Price Standard Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs. 200 kgs.
× × × ×
$4.90 per kg. $5.00 per kg. . $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000 = $1,000

Price variance Quantity variance

$21 favorable $0

9-85
 Materials Variances: An Important Subtlety
Materials Price Variance
Actual Quantity Actual Quantity Actual Quantity
Purchased Purchased Used Standard Quantity
× × × ×
Actual Price Standard Price Standard Price Standard Price
210 kgs. 210 kgs. 200 kgs. 200 kgs.
× × × ×
$4.90 per kg. $5.00 per kg. . $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000 = $1,000

Price variance Quantity variance

$21 favorable $0

9-86
Summary
• Budgets serve both planning and control purposes.

• In variance analysis, static budgets are not very illuminating;

Flexible budgets are a useful control tool.
• Managers must not interpret variances in isolation of each
other.
• Variance analysis leads to questions rather than answers!

• Managers use variances as part of performance evaluate.

But more important, it is used to trigger organization
learning, and to make continuous improvements.

9-87
End of Chapter 9

9-88